When Fast-Growing Retailers Decide to Hit the Brakes

There's nothing so exciting in retailing as a chain expanding at a breakneck pace. But such rollouts eventually slow or end, often accompanied by lots of soul-searching.

That's been the case recently with two chains: Tesco's Fresh & Easy, and Dollar General, although these situations are very different.

Let's look at Tesco first, because it's the most current and more unusual case. The chain last week paused its ambitious U.S. expansion program for three months in order to take stock and make improvements (see story, Page 1). The move was surprising because Fresh & Easy isn't an established chain maxing out on expansion opportunities, but rather one at the beginning of its retail life cycle, having launched in the U.S. only about five months ago.

Tesco's expansion strategy was ambitious for a foreign company still learning about the U.S. market. Since arriving here last November, Tesco had already unveiled about 60 locations and planned to open an additional 150 over the next year. However, the company's small-store concept reportedly was underperforming plans. (This was detailed extensively in last week's SN in the cover story and in this column as well.)

So Tesco had to make a choice. It could make fixes while continuing the rollout, or it could decide to put expansion on hold for a time. The retailer chose the latter course, which was the wiser option, because it needed to devote full attention to retrofitting before pumping out more units. Tesco said it had planned the freeze all along, although many observers expressed doubts. We'll take Tesco at its word that it will be ready to resume expansion after the pause.

Now consider the case of Dollar General, one of the nation's largest small-box discounters. Dollar General's challenges fit the pattern of chains far along on their growth curves. The retailer expanded from 5,000 stores in 25 states in 2000 to 8,200 units in 35 states by 2006.

However, the aggressive growth resulted in a host of problems, because the operator was apparently moving too fast and not conducting adequate research. The discounter changed course in late 2006 by announcing plans for the closure of 400 stores and a slowdown in new units. Last year, Dollar General was acquired in a private buyout, and in January of this year it named a new chief executive, Richard Dreiling.

By putting the brakes on expansion, the company bought time to fix its problems. Last week, Dreiling outlined what comes next (see story, Page 33). He said the retailer would maintain slower growth and refocus on its current store fleet by improving pricing, merchandising and brand image.

Dollar General and Fresh & Easy are far from unique in having to grapple with issues around expansion. Even the king of retailers, Wal-Mart, was forced to face those realities recently. Savvy retailers can turn these situations into opportunities to successfully retool strategies.

The bright spot for supermarkets is that all of these situations led to reductions in the number of competitive stores they faced, at least in the short term. That's a big deal, because not long ago many were saying that supermarkets were being eclipsed by other classes of retailers.